Is it time to water down super funds’ benchmarks to save the planet?

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If the government wants the $3.5 trillion superannuation industry to do more of the investment heavy-lifting on the energy transition and housing, it needs to provide the tools – and this includes cutting them a bit of slack on their performance tests.

This won’t be music to the ears of most superannuants who are mandated to hand over a tenth of their salaries throughout their working lives in the hope it will be sufficient to finance their retirement.

But the big funds have mounted a cohesive campaign that the performance benchmarking to which funds are now subject creates a disincentive to invest super funds in longer-term assets where returns can be riskier.

Finding the right balance between super returns and funding the switch to clean energy: The government needs to find $225 billion over the next 25 years for the green transition.Credit: AP

For more than a decade, a lack of cohesive policies on housing supply and decarbonisation (like carbon pricing) has deprived investors like the super funds of the certainty they have needed to allocate capital – particularly in the energy transition.

This is a hole that successive federal governments dug for themselves.

So now the government is faced with the dilemma of finding the $225 billion needed over the next 25 years to fund the green transition.

The large industry funds that dominate superannuation in this country have increasing leverage at this time. This year’s COP28 gathering in Dubai is clearly signalling that momentum around climate concerns has eased and taken a back seat to current issues around inflation and higher interest rates.

Speaking during COP28, Macquarie’s chief executive Shemara Wikramanayake described the transition to clean energy as ‘a meandering journey’ in a year when the investment bank found difficulty transacting on ‘green assets’.

The push from super funds also comes in a week when one of our two largest mining companies, Rio Tinto, appears to have eased its foot a little off the decarbonisation investment pedal and placed it on limbering up for its iron ore expansion in Guinea.

The bottom line is the government needs this enormous pool of superannuation capital to take up the slack.

‘Meandering journey’: Macquarie CEO Shemara Wikramanayake speaking at the COP28 conference in Dubai.

But the Your Future Your Super (YFYS) reforms introduced in 2021 and overseen by the Australian Prudential Regulation Authority – which names and shames funds that underperform over an eight-year period – can arguably give rise to some negative consequences.

A recent survey by National Australia Bank revealed that most super funds had modelled their investment strategies around the YFYS testing.

Funds have been less inclined to invest in areas where risks (and potential returns) are higher and more inclined to hug the sharemarket index when investing in equities.

In other words, an intended consequence of the super fund benchmarking is the reinforcement of investment lemmings.

The Albanese government had reportedly already begun consultations on watering down the test – even before the superannuation giants descended on Canberra this week to meet with the treasurer, Jim Chalmers.

But it is a delicate balance for the government around how much it should water down YFYS testing if the whole purpose of the policy was to improve returns for super investors.

Over the past few years and in response to YFYS, returns have improved, fees have fallen, transparency has improved and underperforming funds have been digested by better performing outfits.

The real test for the government will be landing on the right spot between winding back policy that was achieving results and giving the superannuation players the incentives to make long-term nation-building investments.

There is danger in getting it wrong.

“Performance testing of superannuation products has been successful, with 17 MySuper products exiting the market by merging with another fund, resulting in the transfer of $75.5 billion in retirement savings to higher performing products across 1.4 million member accounts since the first test in 2021,” according to the Financial Services Council.

“The case for material consumer benefits in addition to the broader economic benefits to Australia should be clear before further changes are implemented to offset the inherent transition costs of further tinkering”, it says.

Meanwhile, the big funds clearly have an appetite for putting capital into the transition.

Only last week, AustralianSuper successfully blocked the $20 billion purchase of Origin by a private equity consortium led by Canada’s Brookfield.

The giant Australian industry fund wanted to retain its stake in Origin and declared its intention to do its part to fund Origin’s metamorphosis from a fossil fuel power generator to a renewable energy company.

Getting the balance right is a tough call.

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